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Thursday, November 08, 2007

A Muted Response

Yesterday afternoon I was interviewed by a reporter researching a story on why the response to high oil prices hasn't been more pronounced, especially on Capitol Hill. To the degree that Congress reacts when consumers complain, however, the current muted response is understandable. While the crude oil price has risen by 29% since Labor Day, the average pump price of unleaded regular has only gone up by 8%, so far. Nor is $3.00/gallon startling, any more, no matter how much it stretches the average person's budget. That kind of price fatigue is unlikely to last, though, if refining margins recover sufficiently to push gasoline to $3.50.

There are many reasons why the current oil price shouldn't be as worrying as the price spikes of the 1970s, and you've heard most of them before. The US uses only half as much energy per dollar of real GDP as it did then, and oil's share of those BTUs is 10% lower, today. At the same time, as I pointed out to the reporter, the price of crude oil is a pretty abstract concept to most people, compared to the price of gasoline or heating oil. I don't know how many other folks have actually bought or sold a barrel of petroleum, but I would guess it's fewer than 1 in 1,000, even counting those who receive royalty payments on their mineral rights.

Contrast that with gasoline. When we fill up at the self-service pump, we can hear it and smell it going into our cars, and most of us experience this at least once a week. How many times a day do Americans see a gas price on a pole-sign? I'd bet more people know the price of a gallon of gasoline than know the price of a loaf of bread. It doesn't get more concrete than that. So when the average retail gasoline price broke $3.00/gallon for the first time after Hurricane Katrina, the public's shock and outrage were palpable, and political consequences followed promptly. And when it breached $3 last summer and again this spring, it was hard for many people to understand, because it was being driven more by tight refining capacity than rising oil prices. With oil company profits soaring on higher refining margins, that didn't seem fair, even if it was a natural consequence of supply and demand.

The current situation is different. This spring, when gasoline peaked at $3.22/gallon, crude oil accounted for less than half of its cost; today, that ratio is over 70%. Oil company profits are being squeezed, as a larger share of the higher oil revenue is going to producers in Venezuela, West Africa and Russia. These shifts may not evoke much sympathy for Big Oil, but they undermine claims that the companies are gouging consumers.

The public's apathy about high oil prices can't last. If oil remains above $90 for very long, sooner or later gasoline prices will spike higher, as heating oil prices are starting to do now. It could happen because demand strengthens, or after some accident or other event shuts down a key refinery or pipeline. Then gasoline will push toward the next major price threshold, the complaints will sharpen, and a torrent of angry emails to Congress will follow, with unpredictable consequences in an election year.